In December 2016 the European Commission published a public consultation considering two broad options for the reform of the VAT rate system:
- Option 1 would keep the standard VAT rate of 15% and regularly update the list of goods and services eligible for reduced rates, on the basis of Member States suggestions. The main aim of this option is to protect the harmonisation of the VAT system, but also to allow it to adapt to changing circumstances.
- Option 2 would remove the minimum rate of 15% and abolish the list of reduced and zero rates, thus granting greater discretion for Member States in fixing their own VAT rates. The main aim of this option is to increase the flexibility of the VAT system, and to allow EU Member States to implement a VAT system that is adapted to their situation.
Brexit notwithstanding, it was crucial that the voice of the charity sector was heard in this important consultation.
CTG led the formulation of the response submitted by the European Charities’ Committee on VAT (ECCVAT) which used this consultation as an opportunity to highlight the ongoing difficulties charities face in the VAT system.
In response to the primary question on the reform options, we stated:
“ECCVAT has been working for many years to address the problems for charities that are inherent in the current VAT system. Clearly, any system that substantially increases flexibility for Member States could benefit the sector across Europe and Option 2 certainly is the more attractive option from that point of view. We recognise that greater flexibility would allow Member States more discretion in supporting goods and activities that would benefit from reduced- and super-reduced rates. This decision is often best made at a local level and Governments would be able to act more quickly to address VAT distortions and difficulties if they were not restricted by existing rules on VAT changes, which require the unanimous support of the Member States. We would welcome this flexibility.
“ECCVAT does, however, have concerns about allowing flexibility to Member States without ensuring that Member States support the recognition that the current VAT system gives to items of social benefit, which it currently does through the application of certain exemptions. Were protections not built in to any new flexible system ECCVAT believes that Option 1 should be introduced. This option would also provide an improvement on the current system, albeit a less significant one, and would go a long way towards addressing some of the structural deficiencies in the VAT system”.
In April 2016, the European Commission (EC) adopted its Action Plan on VAT. This set out a roadmap of actions to be taken to radically change the European VAT system, particularly in relation to cross-border supplies, and to adapt the system better to suit the digital economy and the needs of SMEs.
In 2011, it was decided that the aim of introducing the origin-based VAT system should be abandoned in favour of a destination-based one. Under this new system, the VAT applicable on a sale would relate to the location of the buyer, thereby ensuring that the same tax rate was paid by all sellers. The decision to move to a destination system has opened up the possibility to reform rules on rates and make them less constraining for Member States. Consequently, the Commission intends to present a reform proposal in the autumn of 2017.
- Currently, the list of goods and services eligible for reduced VAT rates is contained in Annex III of the VAT Directive. This list is not regularly updated. Is the range of goods and services eligible for reduced rate treatment adequate?
- In most cases, current rules limit the possible difference in VAT rates within one Member State or between Member States. Sometimes, however, the differences can be relatively large, for example when a Member State has received a specific derogation allowing it to apply super-reduced rates of less than 5% or a zero rate, whereas other Member States apply a standard rate. Are you aware of any distortion of competition resulting from the application of a reduced, super-reduced or zero rate?
- On the basis of your experience, do you think granting additional flexibility to Member States would create new distortions of competition?
- The VAT directive establishes a minimum standard VAT rate of 15% and a list of goods and services which can be subject to a reduced rate of no less than 5%. This system offers harmonisation at EU level but in some cases may limit Member States choices in various ways, for example by ruling out a reduced VAT rate on certain goods or services or by setting a minimum level to the VAT rate. A reform could grant Member States greater room for manoeuvre in this regard. However, this might result in an increase in complexity, creating additional costs for businesses and generating legal uncertainty; this is because, in a destination based system, businesses in each Member State must generally apply the VAT rate applicable in the Member States where they are selling. What should the reform prioritise?
- The reform should propose a solution for the future of super-reduced rates. Many of these derogations were only granted on a temporary basis and are set to expire when the definitive regime is adopted. One option would be to extend the scope of super-reduced rates to all Member States. This would ensure equal treatment among them. However, this could add complication to the VAT system and introduce a risk of erosion of VAT revenues. A second option would be to remove the super-reduced rates from the VAT system; this would simplify the VAT system. However, it would require Member States to abolish the super-reduced rates already granted to specific sectors and revert to the normal regime. What is your view?
- In the current system, Member States are only allowed to apply one standard rate to all transactions and two reduced rates to some transactions (with the exception of super-reduced rates which are specific derogations). A reform could increase the number of rates available to Member States. This would allow Member States greater flexibility, at the cost of introducing greater complication. Do you think Member States should also receive more flexibility regarding the number of rates they can apply (while remaining limited by the list for the application of reduced rates)?
- Should the 15% minimum for the standard rate be maintained?
- Should the 5% minimum for reduced rate be maintained?
- The Commission is now assessing two broad options for the reform of the VAT rate system. The first option aims to keep the standard VAT rate of 15% and update regularly the list of goods and services eligible for reduced rates, on the basis of Member States suggestions. The second option increases flexibility substantially by removing the minimum rate of 15% and abolishing the list, thus granting Member States large discretion to fix their VAT rate. Under both options all currently existing reduced rates, including derogations, legally applied in Member States would be maintained and made available to all Member States, ensuring equal treatment. Which of these two solutions would you prefer?
- Do you think a specific list should be made for goods and services subject to super-reduced rates
- Do you think granting Member State greater flexibility could risk creating, because of more intense tax competition between Member States, an erosion of VAT revenues and/or pressures to narrow the tax base for VAT?